Tag Archives: HMRC

VAT – Top 10 Tax Point Planning Tips

By   24 February 2015
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VAT Tax Point Planning

If a business cannot avoid paying VAT to the HMRC, the next best thing is to defer payment as long as legitimately possible. There are a number of ways this may be done, dependent upon a business’ circumstances, but the following general points are worth considering for any VAT registered entity.

A tax point (time of supply) is the time a supply is “crystallised” and the VAT becomes due to HMRC and dictates the VAT return period in which VAT must be accounted for.  Very broadly, this is the earliest of; invoice date, receipt of payment, goods transferred or services completed (although there are quite a few fiddly bits to these basic rules).

 The aims of tax point planning

1.            Deferring a supplier’s tax point where possible.  It is sometimes possible to avoid one of these events or defer a tax point by the careful timing of the issue of a tax invoice.

2.            Timing of a tax point to benefit both parties to a transaction wherever possible. Because businesses have different VAT “staggers” (their VAT quarter dates may not be the co-terminus) judicious timing may mean that the recipient business is able to recover input tax before the supplier needs to account for output tax.  This is often important in large or one-off transactions, eg; a property sale.

3.            Applying the cash accounting scheme. Output tax is usually due on invoice date, but under the cash accounting scheme VAT is only due when a payment is received.  Not only does this mean that a cash accounting business may delay paying over VAT, but there is also built in VAT bad debt relief.  A business may use cash accounting if its estimated VAT taxable turnover during the next tax year is not more than £1.35 million.

4.            Using specific documentation to avoid creating tax points for certain supplies. If a business supplies ongoing services (called continuous services – where there is no identifiable completion of those services) if the issue of a tax invoice is avoided, VAT will only be due when payment is received (or the service finally ends).

5.            Correctly identifying the nature of a supply to benefit from certain tax point rules. There are special tax point rules for specific types of supplies of goods and services.  Correctly recognising these rules may benefit a business, or present an opportunity for VAT planning.

6.            Generate output tax as early as possible in a VAT period, and incur input tax as late as possible. This will give a business use of VAT money for up to four months before it needs to be paid over, and of course, the earlier a claim for repayment of input tax can be made – the better for cashflow.

7.            Planning for VAT rate changes. Rate changes are usually announced in advance of the change taking place.  There are specific rules concerning what cannot be done, but there are options to consider when VAT rates go up or down.

8.            Ensure that a business does not incur penalties for errors by applying the tax point rules correctly. Right tax, right time; the best VAT motto!  Avoiding penalties for declaring VAT late is obviously a saving.

9.            Certain deposits create tax points, while other types of deposit do not.  It is important to recognise the different types of deposits and whether a tax point has been triggered by receipt of one. Also VAT planning may be available to avoid a tax point being created, or deferring one.

10.         And finally, consider discussing VAT timing planning for your specific circumstances with your adviser.

It should always be remembered that it is usually not possible to apply retrospective VAT planning as VAT is time sensitive, and never more so than tax point planning.

I have advised a lot of clients on how to structure their systems to create the best VAT tax point position.  Any business may benefit, but  I’ve found that those with the most to gain are; professional firms, building contractors, tour operators, hotels, hirers of goods and IT/internet businesses.

(c) Marcus Ward Consultancy Ltd 2015

VAT – Prompt Payment Discounts (PPD) changes to valuation from 1 April 2015

By   19 February 2015
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VAT – Prompt Payment Discount Changes

Businesses don’t have much time to change their accounting procedures and systems to deal with the new PPD rules.  A recent survey has shown that over 13% of business will be affected by the changes which do not appear to have been given much publicity. These changes are necessary to align UK legislation with the EC Principal VAT Directive.  It is crucial that advisers and businesses are not caught out by the change in valuation of supplies offered at a discount.

The changes – summary

Old Rules

Under the previous rules output tax was due on the discounted price offered for prompt payment – regardless of whether the customer takes up the discount.

New Rules

From 1 April 2015 output tax is due on the full consideration actually paid by the customer when PPD is offered.

The new rules are required because HMRC is concerned that there was a difference between output tax paid on the discounted price, and the (higher) amount received if a PPD is not taken.  Historically, this was not so much of an issue because most PPD was offered B2B and the VAT was generally recoverable by the recipient of the supply.  However, increasingly, PPD is now offered B2C and therefore reduces “sticking tax” and the consequential VAT loss for HMRC.

A simple example

Old Rules

B2B PPD of 10% if invoice paid within 21 days.

Goods                                          £10,000

VAT 20% on £9,000                     £1,800

Invoice Total                               £11,800

Both parties post £1,800 to VAT account and there is no adjustment if discount not taken.

New Rules

Using the above figures:

Must assume discount is not taken so invoice total = £12,000

If customer actually takes up PPD a credit note is issued for both elements of the supply – £200 credit for the VAT.

Both parties process the new documentation to adjust the original invoice – VAT is neutral.

This increases a business’ administrative burden and also creates a significant additional risk of penalties and interest if businesses are ignorant of the change, or implement the changes incorrectly.

VAT Input Tax recoverable in each Member State – A country by country guide

By   16 February 2015
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VAT Refunds – Irrecoverable Tax A Country by Country Detailed Guide

VAT incurred in other EC Member States may be recovered in certain circumstances. However, some claims are specifically blocked by Member States. Unfortunately, there are differences between each Member State’s domestic legislation.

For full details of how to make a claim for VAT incurred abroad, please see “Reclaiming VAT Overseas” here

Here is a summary of VAT which cannot be claimed via the refund system:

Austria

VAT cannot be recovered on:

• The purchase, hire, operation and repair of passenger motor vehicles, except driving school vehicles, taxis and hire car vehicles;

• Entertainment expenses, except for business meals where the purpose of the meeting and the identity of the participants are documented.

Belgium

VAT cannot be recovered on:

• Manufactured tobacco;

• Spirits, except those intended for resale or supply in respect of a service (e.g. bars, hotels and restaurants);

• Accommodation, meals and beverages under an accommodation or a catering contract, unless these costs are incurred by a company’s staff effecting outside supplies of goods or services or by taxable persons who in turn supply the same services for consideration;

• Entertainment expenses (although expenses incurred in respect of an advertising event may be recoverable);

• Generally; the purchase of motor vehicles used for passenger transport and goods and services relating to such vehicles (although in some cases a 50% restriction applies and there are exceptions depending on use).

Bulgaria

VAT cannot be recovered on:

• Goods or services intended for making VAT-exempt supplies;

• Goods or services intended for “non-business” supplies;

• Entertainment expenses;

• Motorcycles or passenger cars (with less than five seats, excluding the driver’s seat), although certain exceptions apply;

• Goods or services related to the maintenance of a motorcycle or passenger car; and

• Goods that have been confiscated by the State or a building that has been demolished because it was unlawfully constructed.

Cyprus

VAT cannot be recovered on:

• Non-business supplies; if a supply has both business and non-business purposes, VAT can be reclaimed only on the business portion of the supply;

• Supplies or imports of passenger cars;

• Certain second-hand goods, e.g. cars and antiques for which the VAT margin scheme is used;

• Business entertainment and hospitality expenses, except the provision of

entertainment to employees;

• Supplies used or to be used to make a supply in Cyprus; and

• Goods and services, such as hotel accommodation, purchased for resale and that are for the direct benefit of travellers.

Czech Republic

VAT cannot be recovered on:

• Entertainment expenses.

Denmark

VAT cannot be recovered on:

• Meals for the owner and staff of a business. However, VAT on meals incurred for business purposes is partly refundable;

• The acquisition and running of places of residence for the owner and staff of a business;

• The acquisition and operating costs connected to holiday homes for the owner and staff of a business;

• Entertainment expenses, representation costs and gifts. However, VAT on business entertainment is partly refundable;

• The driving of foreign tourist buses;

• The acquisition, repair and operation of motor vehicles designed for the conveyance of not more than nine persons; and

• Payments in kind to the staff of a business. No more than 25% of VAT may be recovered on restaurant bills and no more than 50% of VAT on hotel accommodation.

• There is a right to deduct a specific amount of VAT for companies that lease

passenger cars if:

• The leasing period is at least six months; and

• The vehicle is used for business purposes for at least 10% of the mileage.

Estonia

A VAT refund is available if an Estonian company can make a similar VAT deduction on its business expenses. This limits the VAT deduction, for example, on meals and entertainment expenses. VAT on accommodation costs is deductible if the trip is not for leisure purposes.

Finland

VAT cannot be recovered on:

• Immovable property that the taxable person or its staff uses as a residence, nursery, recreational or leisure facility, as well as goods and services connected with it or its use;

• Goods and services related to transport between the place of residence and place of work of the taxable person or its staff;

• Goods and services used for business entertainment purposes and business gifts;

• (With some exceptions) Passenger cars, motorcycles, caravans, vessels intended for recreational or sports purposes and aircraft with a maximum permissible take-off weight not exceeding 1,550 kg, or on goods and services related to their use;

• Purchases intended for the private consumption of the entrepreneur or his personnel;

• Purchases related to exempt sales of investment gold;

• Purchases of taxable goods and services for direct benefit of passengers made in the name of a foreign travel service company; and

• Purchases that are VAT-exempt, but have erroneously been charged with VAT.

France

VAT cannot be recovered on:

• Accommodation costs incurred on behalf of the management or staff of a company. (VAT is recoverable when such expenses are incurred for the benefit of persons not employed by the company, provided the expenses are incurred in the interest of the company or when it supplies the same services for consideration);

• The supply, import, leasing, repair and maintenance of most cars for passenger transport and other related costs, such as petrol. (However, 80% of VAT on diesel fuel can be recovered and VAT is recoverable when the cars are purchased by a car dealer for resale or by a person who hires out cars.);

• Goods transferred without remuneration or for remuneration that is much lower than their normal price, unless the value of the goods is very low (except business gifts whose collective value does not exceed EUR 65, including VAT, per beneficiary per year); and

• Domestic transport of passengers and related expenses (except for public transport supplies and transportation from home to work, subject to conditions).

If French VAT has been incorrectly charged, a foreign taxable person can, in principle, obtain a refund (unless a corrected invoice has been issued—a specific procedure applies for a supplier to issue a corrected invoice).

Germany

VAT cannot be recovered on:

• Supplies of goods and services that are not used for business purposes, including gifts; or

• Supplies of services acquired or goods imported connected to certain exempt activities.

Greece

VAT cannot be recovered on:

• Intra-community supplies and exports.

• The supply, import or intra-community acquisition of tobacco products that are destined for use in non-taxable transactions;

• The supply, import or intra-community acquisition of alcoholic beverages that are destined for use in non-taxable transactions;

• Entertainment expenditure, including expenditure on hospitality and amusement;

• The acquisition, leasing or hire, modification, repair or maintenance of passenger vehicles with up to nine seats, pleasure boats except if they are used for the sale, leasing or transportation of persons for a fee;

• Accommodation, food, transport and entertainment expenses incurred for company personnel or representatives;

• The supply of goods and services in connection with real estate located in Greece (in certain circumstances);

• Expenses unrelated to the business activity of the claimant; and

• Incorrect VAT invoicing.

• If the VAT imposed is used for both taxable and exempt transactions, a refund will be granted only in respect of the taxable transactions.

Hungary

VAT cannot be recovered on:

• Use of goods or the services directly for exempt supply of goods and/or services; or

• Use of goods or services for purposes other than taxable business activities, except when the goods or services are entirely used in the interest of achieving taxable objectives.

• Motor fuels and other fuels, goods that are necessary directly for the operation of passenger cars;

• Passenger cars, motorcycles above 125 cc, yachts, sporting and leisure boats;

• Residential buildings (except where a taxable person engaged in the leasing of such buildings opted for taxation of the rental);

• Purchases of goods and services related to the construction and renovation of residential buildings;

• Food and beverages;

• Services received in connection with the operation and maintenance of passenger cars;

• Services of restaurants and other public catering services;

• Entertainment services;

• Taxi services;

• Parking services and highway tolls, with the exception of parking services used and highway tolls paid for a motor vehicle whose gross weight is equal to 3.5 tons or more (including buses); and

• 30% of telephone and mobile phone costs and services related to data submission by internet protocol.

Iceland

VAT cannot be recovered on:

• Cars used for personal transport, including car hires and fuel;

• Food and drinks, including restaurant expenses;

• Gifts and entertainment expenses;

• Residential housing of employees.

Ireland

VAT cannot be recovered on:

• Petrol except diesel;

• Food, drink, hotels/accommodation or other personal services (as from 1 July 2007, VAT on accommodation is recoverable if certain stringent conditions are satisfied);

• Entertainment expenses; and

• The purchase, hire or importation of passenger motor vehicles (VAT on motor vehicles used for certain purposes is recoverable).

Italy

VAT cannot be recovered on:

• Entertainment expenses.

• It is possible to deduct VAT paid on cars/fuel/maintenance used for the company’s business. The percentage deduction set by Italian VAT legislation is 40% in the case of both private and business use. The deduction is 100% if exclusively used for business purposes.

Latvia

VAT cannot be recovered on:

• The acquisition of unused immovable property and services received in relation to the construction, reconstruction, renovation, restoration or repair of immovable property;

• Goods and services purchased for personal use;

− Rental, maintenance and repair of a passenger car if these services are not used for business purposes. If the vehicle is used for business purposes, VAT can be recovered for the business use (in proportion to that use), but the claimant must provide supporting documentation with the application (e.g. route description in Latvian or English);

− Purchase of fuel, lubricants and spare parts intended for a passenger car if they are not used for business purposes;

− Expenses for recreation activities;

− Catering (including restaurants);

− Health improvement activities; and

− Entertainment.

Lithuania

VAT cannot be recovered on:

• The purchase or lease of a passenger car;

• Transport of passengers by cars (taxi services);

• Entertainment and representation expenses. However, where a taxable person is established in the EU, 75% of the VAT incurred on entertainment and representation expenses (goods and

services) is refundable;

• The supply of goods or services on which VAT does not have to be accounted for;

• Goods supplied to another EU member state if the supply of these goods would have been subject to the zero rate; and

• Goods exported from the EU if the supply of these goods would have been subject to the zero rate.

Luxembourg

VAT cannot be recovered on:

• Supplies on which VAT has been charged by mistake;

• Goods or services that are VAT exempt.

• Goods or services used for private purposes.

Malta

VAT cannot be recovered on:

• Tobacco or tobacco products, except those intended for resale;

• Alcoholic beverages, except those intended for resale or for the supply of catering;

• Works of art, collectors’ items and antiques, except those intended for resale;

• Non-commercial motor vehicles (and goods and services for the purpose of

repairing, maintaining and fuelling non-commercial motor vehicles), except those intended for resale, charter/hire, driving instructions or for the purpose of the carriage of goods or passengers for consideration;

• Vessels or aircraft, except those intended for resale or charter/hire for the purpose of the carriage of goods or passengers for consideration;

• Purchases relating to the provision of hospitality or entertainment, subject to certain exceptions; and

• Purchases relating to the provision of transport or entertainment to employees, subject to certain exceptions.

The Netherlands

VAT cannot be recovered on:

• Supplies of goods and services that are not used for business purposes;

• Supplies acquired or imported in connection with an exempt business activity;

• Food and drinks in restaurants, hotels and cafes;

• Business entertainment in excess of EUR 227 per year per person;

• Employee benefits in-kind in excess of EUR 227 per year per person;

• VAT on costs for the lease or rental of cars (these are limited to an 84% VAT refund – a 16% adjustment is made for private use).

Norway

VAT cannot be recovered on:

• Entertainment expenses;

• Food and drinks;

• The purchase, hire or importation of passenger cars, as well as on petrol, oil, repairs, maintenance and other related costs;

• Goods and services acquired for use outside the scope of Norwegian VAT;

• Goods imported and used for activities outside the scope of Norwegian VAT; and

• Benefits-in-kind for employees.

Poland

VAT cannot be recovered on:

• Goods and services, the acquisition of which resulted from a donation or free provision of services;

• Lodging and catering services, with some exceptions;

• The deductibility of input VAT on the purchase (lease) of passenger cars is limited to 60%, but not exceeding PLN 6,000 per car.

• The purchase of engine fuel, diesel oil and gas for passenger cars or other motor vehicles.

Portugal

VAT cannot be recovered on:

• Accommodation, food and drinks (except in the case of specific events);

• Entertainment expenses;

• Purchase, hire, importation and repairs of vehicles, boats, and aircraft (unless these assets are used in specific activities). However, it is possible to recover VAT incurred on commercial cars and trucks;

• Fuel expenses (50% of the VAT on diesel is recoverable and 100% if certain

vehicles are involved);

• Tobacco; and

• Travel expenses, including tolls (except in the case of specific events).

Romania

VAT cannot be recovered on:

• Invoices on which VAT was unlawfully charged;

• Acquisitions that can be VAT exempt;

• Acquisitions made by tour operators that apply the margin scheme in the Member State in which they are established;

• Tobacco products and spirits, except those intended for resale or for supply during the performance of a catering service and;

• Acquisitions of passenger vehicles and fuel (with some exceptions).

Slovak Republic

VAT cannot be recovered on:

• Supplies of goods and services where the application of VAT was not in compliance with the Slovak VAT legislation;

• Supplies of goods that are or may be exempt from VAT (intra-Community supply of

goods, export of goods); or

• Supplies made under the tour operator margin scheme.

Slovenia

VAT cannot be recovered for:

• Yachts and boats for sport and amusement, fuel, lubricants, spare parts and related services;

• Aircraft and fuel, lubricants, spare parts and connected services;

• Cars and motor bikes and fuel, spare parts and related services;

• Accommodation, meals and beverages, unless these costs are incurred by a taxable person in the course of supplies made as part of their economic activity and;

• Entertainment expenses.

Spain

VAT cannot be recovered on:

• Entertainment expenses;

• Food and drinks, tobacco;

• Jewels and precious stones;

• VAT on accommodation, restaurant and travel expenses will be refundable only to the extent the expenses are deductible for personal and corporate income tax purposes.

• VAT incurred on car rentals and fuel will be refundable only if the car is exclusively used for business activities.

• If not exclusively used for business activities, refunds of VAT on car purchases, car importations and car leases will be possible, but only if the car can be considered an investment good for Spanish VAT purposes (ie; it must be used for at least one year within the company), and only for the proportion that the vehicle is used for business purposes (a business use of at least

50% will be required).

Sweden

VAT cannot be recovered on:

• Permanent accommodation;

• Travel services (only applicable to persons supplying travel services);

• Unreasonable entertainment services;

• Purchase of motor vehicles; and

• Car rentals (these are 50% refundable), with certain exceptions for vehicles intended to be sold or leased by a taxable person whose particular economic activity involves the sale or leasing of motor vehicles, vehicles intended to be solely used for passenger transport for hire or reward and vehicles intended to be used for driving license education and transport of the deceased.

United Kingdom

VAT cannot be recovered on:

• Non-business supplies (if a supply covers both business and non-business use VAT can be reclaimed on the business element of the supply);

• Supplies the claimant intends to use for carrying on an economic activity in the

U.K. or that the claimant intends to export from the U.K. (i.e. economic activities, the place of supply of which is the U.K.);

• Business entertainment and hospitality expenses and other expenses on which the recovery of VAT is restricted in the U.K.;

• Goods and services purchased for resale (e.g. as part of package holiday) and which are for the direct benefit of travellers;

• VAT that has been incorrectly invoiced or where VAT has been charged on the dispatch of goods to another Member State, or the export of goods outside the EU;

• The purchase or import of passenger motor vehicles, unless used wholly for business purposes and

• Certain second-hand goods, such as antiques, for which a tax invoice will not be issued.

• Not more than 50% of VAT can be recovered on the lease of passenger motor vehicles not used solely for business purposes.

Claims

For details of how to make a claim for VAT incurred abroad, please see “Reclaiming VAT Overseas” here

VAT Penalties: A Discussion Document by HMRC

By   11 February 2015
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A discussion document is seeking views by 11 May about potential improvements to how HMRC applies penalties for failing to pay what is owed or to meet deadlines for returns or registration.

As HMRC designs a tax system for the modern, digital world, it wants to ensure that its approach to penalties also keeps up to date with both technology and behavioural science. HMRC is considering whether and how it should differentiate between those who deliberately and persistently fail to meet administrative deadlines or to pay what they should on time, and those who make occasional and genuine errors for which other responses might be more appropriate.

HMRC is looking for feedback from individuals and businesses. The purpose of the discussion is to seek views on the policy design and any suitable possible alternatives, before consulting later on a specific proposal for reform.

I look at the main points below and identify where changes to the penalty system are most likely to be made.

The document may be accessed here:

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/400211/150130_HMRC_Penalties_a_Discussion_Document_FINAL_FOR_PUBLICATION__2_.pdf

 Summary

In terms of Indirect Tax there are two main areas which HMRC is focussing on:

VAT default surcharge – HMRC highlights two issues with the current VAT default surcharge regime. The first is the concern that while the absence of penalty for the initial offence in a 12 month period gives business the chance to get processes right, some customers simply ignore this warning.

The second concern is the issue of proportionality which fails to distinguish between payments that are one or two days late or many months late.

 Excise regulatory penalties – This also considers proportionality, noting that regulatory failures can lead to very large penalties, because the penalty is fixed as a percentage of the duty. The size of such penalties might be viewed as disproportionate.

The existing, long-standing default surcharge regime has always had issues with the principle of proportionality.  The regime has been challenged in the Courts –  notably in the Trinity Mirror Plc case (soon to be heard at the UT) where the earlier FTT allowed the appeal against a default surcharge on the grounds of proportionality.

If you would like assistance in making a representation please contact me.

The penalty regime….the dark side of VAT!

By   9 February 2015
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I have made a lot of references to penalties in my other articles. So what are they, and how much could they cost if a business gets it wrong?

HMRC detail three categories of inaccuracy. These are significant, as each has its own range of penalty percentages. If an error is found to fall within a lower band, then a lower penalty rate will apply. Where the taxpayer has taken ‘reasonable care,’ even though an error has been made, then usually HMRC will not apply a penalty.

Penalty Categories 

–  An error, when reasonable care not taken: 30%;

–  An error which is deliberate, but not concealed: 70%;

–  An error, which is deliberate and concealed: 100%.

Unhelpfully, there is no definition of ‘reasonable care’. However, HMRC have said that they would not expect the same level of knowledge or expertise from a self-employed person, as from a large multi-national.  HMRC expect that, where an issue is unclear, advice is sought, and a record maintained of that advice. They also expect that, where an error is made, it is adjusted, and HMRC notified promptly. They have specifically stated that merely to adjust a return will not constitute a full disclosure of an error. Therefore a penalty may still be applicable.

The amount of the penalty is calculated by applying the appropriate penalty rate (above) to the ‘Potential Lost Revenue’ or PLR. This is essentially the additional amount of VAT due or payable, as a result of the inaccuracy, or the failure to notify an under-assessment. Special rules apply where there are a number of errors, and they fall into different penalty bands.

Defending a penalty

The percentage penalty may be reduced by a range of ‘defences:’

–  Telling; this includes admitting the document was inaccurate, or that there was an under-assessment, disclosing the inaccuracy in full, and explaining how and why the inaccuracies arose;

–  Helping; this includes giving reasonable help in quantifying the inaccuracy, giving positive assistance rather than passive acceptance, actively engaging in work required to quantify the inaccuracy, and volunteering any relevant information;

–  Giving Access; this includes providing documents, granting requests for information, allowing access to records and other documents.

Further, where there is an ‘unprompted disclosure’ of the error, HMRC have power to reduce the penalty further. This measure is designed to encourage businesses to have their VAT returns reviewed.

A disclosure is unprompted if it is made at a time when a person had no reason to believe that HMRC have discovered or are about to discover the inaccuracy. The disclosure will be treated as unprompted even if at the time it is made, the full extent of the error is not known, as long as fuller details are provided within a reasonable time.

HMRC have included a provision whereby a penalty can be suspended for up to two years. This will occur for a careless inaccuracy, not a deliberate inaccuracy. HMRC will consider suspension of a penalty where, given the imposition of certain conditions, the business will improve its accuracy. The aim is to improve future compliance, and encourage businesses which genuinely seek to fulfil their obligations.

Appealing a penalty

HMRC have an internal reconsideration procedure. A business should apply to this in the first instance. If the outcome is not satisfactory, the business can pursue an appeal to the Tribunal. A business can appeal whether a penalty is applicable, the amount of the penalty, a decision not to suspend a penalty, and the conditions for suspension.

The normal time limit for penalties to four years. Additionally, where there is deliberate action to evade VAT, a 20 year limit applies. In particular, this applies to a loss of VAT which arises as a result of a deliberate inaccuracy in a document submitted by that person.  These are just the penalties for making errors on VAT returns. HMRC have plenty more for anything from late registration to issuing the wrong paperwork.

Help

In my view there is generally a very good chance of success in a business challenging a penalty.  Each case should at least be reviewed by an adviser, and experience insists that a robust defence often results in full or part mitigation.  We have a very good track record in appealing HMRC decisions and have taken cases right up to High Court.  However, most cases can be settled before they get to Tribunal, and indeed, the greatest chance of success is usually at the beginning of the process before HMRC become entrenched.

VAT – Splitting a business to avoid registration doesn’t work

By   30 January 2015
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I have a cunning plan to avoid registering for VAT…….

….I’ll simply split my business into separate parts which are all under the VAT registration turnover limit – ha!

I’ve heard this said many a time in “bloke in the pub” situations. But is it possible?

You will not be surprised to learn that HMRC don’t like such schemes and there is legislation and case law for them to use to attack such planning known as “disaggregation”. This simply means artificially splitting a business.

What HMRC will consider to be artificial separation:

HMRC will be concerned with separations which are a contrived device set up to circumvent the normal VAT registration rules. Whether any particular separation will be considered artificial will, in most cases, depend upon the specific circumstances. Accordingly it is not possible to provide an exhaustive list of all the types of separations that HMRC will view as artificial. However, the following are examples of when HMRC would at least make further enquiries:

Separate entities supply registered and unregistered customers

In this type of separation, the registered entity supplies any registered customers and the unregistered part supplies unregistered customers.

Same equipment/premises used by different entities on a regular basis

In this type of situation, a series of entities operates the same equipment and/or premises for a set period in any one-week or month. Generally the premises and/or equipment is owned by one of the parties who charges rent to the others. This situation may occur in launderettes and take-aways such as fish and chip shops or mobile catering equipment.

Splitting up of what is usually a single supply

This type of separation is common in the bed and breakfast trade where one entity supplies the bed and another the breakfast. Another is in the livery trade where one entity supplies the stabling and another, the hay to feed the animals. There are more complex examples, but the similar tests are applied to them too.

Artificially separated businesses which maintain the appearance of a single business

A simple example of this type of separation includes; pubs in which the bar and catering may be artificially separated. In most cases the customer will consider the food and the drinks as bought from the pub and not from two independent businesses. The relationship between the parties in such circumstances will be important here as truly franchised “shop within a shop” arrangements will not normally be considered artificial.

One person has a controlling influence in a number of entities which all make the same type of supply in diverse locations

In this type of separation a number of outlets which make the same type of supplies are run by separate companies which are under the control of the same person. Although this is not as frequently encountered as some of the other situations, the resulting tax loss may be significant.

The meaning of financial, economic and organisational links

Again each case will depend on its specific circumstances. The following examples illustrate the types of factors indicative of the necessary links, although there will be many others:

Financial links

  • financial support given by one part to another part
  • one part would not be financially viable without support from another part
  • common financial interest in the proceeds of the business

Economic links

  • seeking to realise the same economic objective
  • the activities of one part benefit the other part
  • supplying the same circle of customers

Organisational links

  •  common management
  • common employees
  • common premises
  • common equipment

HMRC often attack structures which were not designed simply to avoid VAT registration, so care should be taken when any entity VAT registers, or a conscious decision is made not to VAT register. Registration is a good time to have a business’ activities and structure reviewed by an adviser.

As with most aspects of VAT, there are significant and draconian penalties for getting registration wrong, especially if HMRC consider that it has been done deliberately to avoid paying VAT.

VAT – Prompt Payment Discounts; new rules

By   19 January 2015
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The rules on how VAT is accounted for on prompt payment discounts (PPD) will change on 1 April 2015.  Currently, suppliers offering a PPD are able to account for output tax on the discounted price, even if the PPD is not taken up by the customer.

From April, suppliers must account for output tax on the amount actually received.

This will entail changes to accounting processes for, and recovering VAT when a prompt payment discount is offered and taken up, and the new rules provide for an alternative to issuing credit notes.

HMRC Brief 49 is here; https://www.gov.uk/government/publications/revenue-and-customs-brief-49-2014-vat-prompt-payment-discounts/revenue-and-customs-brief-49-2014-vat-prompt-payment-discount

And I have reproduced it in full below:

HMRC Brief 49

1.Introduction

PPD VAT legislation was amended earlier this year. This brief provides guidance on what to do when you raise or receive a VAT invoice offering a PPD from the 1 April 2015 when the change takes effect.

2.Who needs to read this?

Suppliers who offer and customers who receive PPD where an invoice is issued.

3.Background

A PPD is an offer by a supplier to their customer of a reduction in the price of goods and/or services supplied if the customer pays promptly; that is, after an invoice has been issued and before full payment is due. For example a business may offer a discount of 5% of the full price if payment is made within 14 days of the date of the invoice.

  • at present, suppliers making PPD offers are permitted to put on their invoice, and account for, the VAT due on the discounted price, even if the full price (i.e. the undiscounted amount) is subsequently paid. Customers receiving PPD offers may only recover as input tax the VAT stated on the invoice.
  • after the change, suppliers must account for VAT on the amount they actually receive and customers may recover the amount of VAT that is actually paid to the supplier.

Changes were made to UK legislation in the Finance Act 2014 in order to protect the revenue, and put it beyond doubt that UK legislation is aligned with EU legislation. The new legislation is at paragraph 4 below.

The change took effect on 1 May 2014 for supplies of broadcasting and telecommunication services where there was no obligation to provide a VAT invoice. For all other supplies the change takes effect on 1 April 2015.

A consultation took place between 17 June and 9 September 2014 asking businesses for their views and suggestions on how the changes should be implemented. In particular whether issuing credit or debit notes to evidence a change in the consideration would cause them difficulties. The Summary of Consultation Responses was published shortly after Autumn Statement 2014. We accepted that an alternative to issuing credit or debit notes was needed (see guidance below).

4.The New Legislation

The revised paragraph 4, Schedule 6, VATA 1994 is set out below:

4 (1) Sub-paragraph (2) applies where. (a) goods or services are supplied for a consideration which is a price in money, (b) the terms on which those goods or services are so supplied allow a discount for prompt payment of that price, (c) payment of that price is not made by instalments, and (d) payment of that price is made in accordance with those terms so that the discount is realised in relation to that payment. (2) For the purposes of section 19 (value of supply of goods or services) the consideration is the discounted price paid.

5.Guidance

Suppliers:

a) on issuing a VAT invoice, suppliers will enter the invoice into their accounts, and record the VAT on the full price. If offering a PPD suppliers must show the rate of the discount offered on their invoice (Regulation 14 of the VAT Regulations 1995 (SI 1995/2518)).

b) the supplier will not know if the discount has been taken-up until they are paid in accordance with the terms of the PPD offer, or the time limit for the PPD expires.

c) the supplier will need to decide, before they issue an invoice, which of the processes below they will adopt to adjust their accounts in order to record a reduction in consideration if a discount is taken-up.

d) when adjustments take place in a VAT accounting period subsequent to the period in which the supply took place the method of adjustment needs to comply with Regulation 38 of the VAT Regulations 1995 (SI 1995/2518).

e) suppliers may issue a credit note to evidence the reduction in consideration. In which case, a copy of the credit note must be retained as proof of that reduction.

f) alternatively, if they do not wish to issue a credit note, the invoice must contain the following information (in addition to the normal invoicing requirements):

  • the terms of the PPD (PPD terms must include, but need not be limited to, the time by which the discounted price must be made).
  • a statement that the customer can only recover as input tax the VAT paid to the supplier.

Additionally, it might be helpful for invoices to show:

  • the discounted price
  • the VAT on the discounted price
  • the total amount due if the PPD is taken up.

g) if a business has adopted the option at (f), the VAT invoice, containing appropriate wording as described above, together with proof of receipt of the discounted price in accordance with the terms of the PPD offer (e.g. a bank statement) will be required to evidence the reduction in consideration, and the reduction to the supplier’s output tax (in accordance with Regulation 38 of the VAT Regulations 1995).

h) we recommend businesses use the following wording on the invoice:

“A discount of X% of the full price applies if payment is made within Y days of the invoice date. No credit note will be issued. Following payment you must ensure you have only recovered the VAT actually paid.”

i) if the discounted price is paid in accordance with the PPD terms, then the supplier must adjust their records to record the output tax on the amount actually received.

If the full amount is received no adjustment will be necessary.

Customers:

On receiving an invoice offering a PPD a VAT registered customer may recover the VAT charged, in accordance with VAT Regulation 29 of the VAT Regulations 1995.

As adjustments may take place in a VAT accounting period subsequent to the period in which the supply took place the method of adjustment needs to comply with Regulation 38 of the VAT Regulations 1995 (SI 1995/2518).

In practice this will mean:

a) if the customer pays the full price they record it in their records and no VAT adjustment is necessary.

b) if the customer pays the discounted price in accordance with the PPD terms on receipt of the invoice they may record the discounted price and VAT on this in their accounts and no subsequent VAT adjustment is necessary.

c) if the customer does not pay when the invoice is first issued, they must record the full price and VAT in their records as shown on the invoice. If they subsequently decide to take-up the PPD then:

  • if they have received an invoice setting out the PPD terms which states no credit note will be issued they must adjust the VAT in their records when payment is made. They should retain a document that shows the date and amount of payment (e.g. a bank statement) in addition to the invoice to evidence the reduction in consideration.
  • if the supplier’s invoice does not state that a credit note will not be issued, the customer must adjust the VAT they claim as input tax when the credit note is received. They must retain the credit note as proof of the reduction in consideration.
  • Imports

The legislation in relation to prompt payments on imports has not changed; section 21(3) of VATA 1994 still applies.

Payments outside PPD terms

Where a supplier receives a payment that falls short of the full price but which is not made in accordance with the PPD terms it cannot be treated as a PPD. The supplier must account for VAT on the full amount as stated on the invoice. If the amount not paid remains uncollected it will become a bad debt in the normal way. If a price adjustment is agreed later, then adjustment must be made in the normal way e.g. a credit note.

For more information please contact us.

VAT implications of renewable energy sources

By   15 January 2015
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If you own land and install solar panels (which we shall use as an example, although the rules apply equally to any way of generating renewable power), it is relatively straightforward; as you are either consuming the power, or are the provider supplying electricity back to the National Grid.

Where the position may get slightly more complicated is where a solar panel business buy the ‘space’ to install energy producing equipment from someone else. Many businesses are renting the roof space from others upon which to install the solar panels. The businesses may pay the roof owners with ‘free’ electricity in return for renting out this space. Supply of electricity to the owners of the site

For a solar panel business leasing a site, the supply of electricity to the owners of that site is deemed to be a supply of goods.

The business installing the solar panels is the taxable person (if they are, or should be registered for VAT) and they are supplying the owners of the site with a ‘cheap’ supply of electricity in the course of the furtherance of their business.

The supply of electricity for domestic use is a reduced-rate supply under Group 1 of Schedule 7A VATA 1994. The reduced rate of VAT is 5%. If the site owner is using the electricity for domestic purposes then the reduced rate of 5% should apply. If the electricity is being used for business purposes then the supply becomes standard-rated at 20%. However, if there is mixed use, then so long as more than 60% of the use is domestic then the whole supply will be treated as ‘qualifying use’ ie; domestic, and the 5% will apply to the entire amount. Generally speaking, VAT charged at 5% is fully or partly irrecoverable by the recipient.

So in this scenario, the land owner is providing something in exchange for this electricity use; the land owner is giving the solar panel business the use of his land. Therefore this is ‘consideration’ for a service; even if it is ‘non-monetary’ consideration.

This means that the solar panel business will have to calculate a value for this consideration and then charge 5% (or 20%) VAT as necessary, on this amount if they are VAT registered.

The value placed on this non-monetary consideration is not usually a concern for the land owner making the supplies of this land, as this land supply is itself exempt from VAT.

The supply of the land
This is a supply of land by the owner of the site. Unless the land has been ‘opted to tax’ (OTT) then this supply will be exempt from VAT. If the land has been OTT by the landowner – the parties will need to look at the valuation of the (non-monetary) consideration as this will be subject to VAT at 20%. If there is no OTT and the supply is exempt; for a non-VAT registered person, this will have no impact, and this income will not be included in taxable supplies which count towards the VAT registration threshold. If a VAT registered entity makes exempt supplies of land, consideration must be given to his partial exemption position.

VAT consequences of the Feed-In Tariff
In recognition of the higher cost of producing electricity in this manner, people participating in the Feed in Tariff scheme will receive payment under a “generation tariff”. This payment is not consideration for any supply and it is therefore outside the scope of VAT.

Supply of electricity to the electricity board
In addition to the Feed-In Tariff there is the additional income which you may receive from the electricity board ie; the “Export Tariff”. These payments are “consideration for supplies of electricity by people participating in the Feed in Tariff scheme to the electricity company, where they are made by taxable persons in the course of their business”. The export tariff is not outside the scope of VAT and therefore it is a supply of electricity made in the course of the furtherance of your business to the electricity supplier. It will attract standard rated VAT as it is not the supply for domestic use.

 Further…

A recent Court of Justice of the European Union (CJEU – the EU’s highest court) case has ruled in favour of the taxpayer after he argued that solar panels installed on his house constituted a business for VAT purposes. This is good news for any people who supply any energy into the grid and are paid a feed-in tariff (FiT) for doing so.

It means that anyone receiving the FiT can VAT register and reclaim (at least some) VAT incurred on the purchase and installation of solar panels plus input tax incurred on any other goods and services relating to the panels.

The supply and installation of “energy saving materials”, including solar panels, is currently subject to a reduced VAT rate of 5% in the UK. The European Commission is currently challenging this policy, arguing that the tax incentive goes beyond the scope of the law. The VAT Directive only allows Member States to apply reduced VAT rates to a limited number of goods and services, which are specified in an annex to the directive. So the cost of buying and installing solar panels may increase in the future.

It is anticipated that HMRC will need to deal with “thousands” of extra registration applications resulting in significant additional VAT repayments.

Oops! – Top Ten VAT howlers

By   6 January 2015
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I am often asked what the most frequent VAT errors made by a business are. I usually reply along the lines of “a general poor understanding of VAT, considering the tax too late or just plain missing a VAT issue”.  While this is unquestionably true, a little further thought results in this top ten list of VAT horrors:

  1. Not considering that HMRC may be wrong. There is a general assumption that HMRC know what they are doing. While this is true in most cases, the complexity and fast moving nature of the tax can often catch an inspector out. Added to this is the fact that in most cases inspectors refer to HMRC guidance (which is HMRC’s interpretation of the law) rather to the legislation itself. Reference to the legislation isn’t always straightforward either, as often EC rather than UK domestic legislation is cited to support an analysis. The moral to the story is that tax is complicated for the regulator as well, and no business should feel fearful or reticent about challenging a HMRC decision.
  2.  Missing a VAT issue altogether. A lot of errors are as a result of VAT not being considered at all. This is usually in relation to unusual or one-off transactions (particularly land and property or sales of businesses). Not recognising a VAT “triggerpoint” can result in an unexpected VAT bill, penalties and interest, plus a possible reduction of income of 20% or an added 20% in costs. Of course, one of the basic howlers is not registering at the correct time. Beware the late registration penalty, plus even more stringent penalties if HMRC consider that not registering has been done deliberately.
  3.  Not considering alternative structures. If VAT is looked at early enough, there is very often ways to avoid VAT representing a cost. Even if this is not possible, there may be ways of mitigating a VAT hit.
  4.  Assuming that all transactions with overseas customers are VAT free. There is no “one size fits all” treatment for cross border transactions. There are different rules for goods and services and a vast array of different rules for different services. The increase in trading via the internet has only added to the complexity in this area, and with new technology only likely to increase the rate of new types of supply it is crucial to consider the implications of tax; in the UK and elsewhere.
  5.  Leaving VAT planning to the last minute. VAT is time sensitive and it is not usually possible to plan retrospectively. Once an event has occurred it is normally too late to amend any transactions or structures. VAT shouldn’t wag the commercial dog, but failure to deal with it at the right time may be either a deal-breaker or a costly mistake.
  6.  Getting the option to tax wrong. Opting to tax is one area of VAT where a taxpayer has a choice. This affords the possibility of making the wrong choice, for whatever reasons. Not opting to tax when beneficial, or opting when it is detrimental can hugely impact on the profitability of a project. Not many businesses can carry the cost of, say, not being able to recover VAT on the purchase of a property, or not being able to recover input tax on a big refurbishment. Additionally, seeing expected income being reduced by 20% will usually wipe out any profit in a transaction.
  7.  Not realising a business is partly exempt. For a business, exemption is a VAT cost, not a relief. Apart from the complexity of partial exemption, a partly exempt business will not be permitted to reclaim all of the input tax it incurs and this represents an actual cost. In fact, a business which only makes exempt supplies will not be able to VAT register, so all input tax will be lost. There is a lot of planning that may be employed for partly exempt businesses and not taking advantage of this often creates additional VAT costs.
  8.  Relying on the partial exemption standard method to the business’ disadvantage. A partly exempt business has the opportunity to consider many methods to calculate irrecoverable input tax. The default method, the “standard method” often provides an unfair and costly result. I recommend that any partly exempt business obtains a review of its activities from a specialist. I have been able to save significant amounts for clients simply by agreeing an alternative partial exemption method with HMRC.
  9.  Not taking advantage of the available reliefs. There are a range of reliefs available, if one knows where to look. From Bad Debt Relief, Zero Rating (VAT nirvana!) and certain de minimis limits to charity reliefs and the Flat Rate Scheme, there are a number of easements and simplifications which could save a business money and reduce administrative and time costs.
  10.  Forgetting the impact of the Capital Goods Scheme. The range of costs covered by this scheme has been expanded recently. Broadly, VAT incurred on certain expenditure is required to be adjusted over a five or ten year period. Failure to recognise this could either result in assessments and penalties, or a position whereby input tax has been under-claimed. The CGS also “passes on” when a TOGC occurs, so extra caution is necessary in these cases.

So, you may ask: “How do I make sure that I avoid these VAT pitfalls?” – And you would be right to ask.

Of course, I would recommend that you engage a VAT specialist to help reduce the exposure to VAT costs!

What is the value of a sale for VAT? – Prompt Payment Discounts

By   15 December 2014
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The value of a supply is crucial for VAT.

The area of discounts has always been problematic, particularly in respect of prompt payments discounts (which customers sometimes do, and sometimes do not take advantage of).

HMRC has clarified the position and has published:  which confirms that from 1 April 2015, all businesses that offer Prompt Payment Discounts will be obliged to account for VAT on the sum actually received in return for the goods or services supplied (rather than the reduced value offered – as is the current position).